So guys do you want to know
What is mutual fund ?
How should you invest in it ?
How it is different from share market ?
Basically all the necessary information in that regard, being a common man or a novice investor you will get in this blog .
So every month when your salary is accumulated, you keep a part of that salary as savings. You keep some money for your later use, maybe for an emergency or you want to buy home, or car and you save for that. So here a question arise in your mind that where to invest ?. An easy way is to keep your salary in the bank and deposit it. Friends, this is a very bad way because such money has lost its value. Inflation is rising in our country and so are the prices of goods.The value of your money decreases by 4-5% every year depending on the rate of inflation. People invest money so that they don't lose their value just by lying. There are different places to invest. There are mainly 4 places to invest. No. 1 is a savings account, No. 2 is an FD or term deposit, No. 3 is gold or jewelry People buy gold or jewellery with their money and No. 4 is real estate. People buy properties or land or house. Some people who want to take more risk invest in the stock market which is another way to invest their money. Each investment consists of 3 things, return, risk and time. Return is the percentage of profit you make by investing. If our inflation rate is 4%, we should see that the profit return is at least more than 4%.Otherwise there is no point of investment if you have put your money and the value didn't increase. Because the rate of inflation is also rising, the risk is how risky it is to invest, what is the probability of losing all your money in that investment? What are the chances of going into a loss after investing there. And time is how long you invest.
So the basic risk here is that if the time is more, risk is more then the returns will also be more. If you want more return percentage on your investment then you will have to take more risk and should invest for a longer period. Saving accounts has the minimum risk and there is no restriction too. You can save or take the money out at any time. But the return here we get is also very less, only 4% whereas our inflation rate in the last few years have been 4-5% . Fixed deposit is also a less risky option but it has a time limit before that we can't take the money out. Hence the return is also a bit more, somewhat 7-8%. Gold and jewellery these days have a significant risk, their prices fluctuates a lot. If you are going to look at this history, then you will understand that prices were rising continuously till 2012. If you had invested before 2012, you would have got a good return here. But after 2012 there have been a lot of ups and down but they have maintained a level, hence there's not a much profit. Investment in the properties and real investment has low to moderate risk I would say. You can see the India's housing prices in the last few years. It has come up and down a lot. In the quarter or March 2011 it has touched the return rates of 30%and in March 2018 latest quarter then it gives just 5% return rates. One of the disadvantage in investing in housing is that it needs a lot of capital, you need to have lacs and crores of rupees to invest. So this is a disadvantage. You may have heard of stock market friends, you can get a lot of returns here but also losses.The risk of investing in stock market depends on the stock where you are investing. You need to have a good knowledge of the performances of the stock and how does the stock market works basically. You shouldn't be investing here if you don't have this knowledge. So these are few main types of investments that I have told you but there are some other types too like Government bonds, corporate bonds, we have cryptocurrency too these days, people also invests in bitcoins. A general well known advice is that friends you should never invest your money in one place. You should invest in different places so that you do not have to bear all the losses if something crashes. It's a very less chance of everything crashing altogether like, gold, properties and even stock market. as this happens were rarely Chances are that if one thing crashes then you can get profit from the other. This is called as diversification, you have to invest at different places.
What is Mutual Fund ?
Mutual funds is a special kind of investment through which you can invest on different types together. you can do a diversifies investment by investing at one place. Asst Management Company starts mutual funds. Basically you give your money to Asset Management Company and many people like you do so. that company invest all the money collectively at different places. They have hired experts and they invest the money at their suggestion. They invest money in different places and the rate of return is combined in these different places. Some 1-2% of the assets are kept as company profit and the rest is returned to you according to the return rate. HDFC, HSBC, ICICI, Aditya Birla, Reliance, TATA, these are the few examples of companies and banks who have started their own Asset Management company. All the companies starts different kinds of mutual funds in large numbers. For example ICICI has started more than 1200 mutual funds. So how risky is your mutual funds and what is the return depends on the mutual funds that you are investing in. mutual funds can give the return rate of 4% and also of more than 30% too. It can be of zero risk and also of high risk to. Because all this depends on where the asset management company is investing your money. If that company is investing on stocks then it will be more risky and you will get more returns and if it's investing in the government bonds then it will be less risky. Different types of Mutual funds depends on the basis of the investment done by AMC people.
We can divide this in the 3 categories:
1)Equity mutual funds
2) Debt Mutual Funds
3)Hybrid Mutual funds.
Equity mutual fund
In Equity Mutual Funds, your money will be invested in the stock market. So naturally in this type of Mutual funds generally the risk is more and also the return. In the stock market on which kind of company are you investing, if it's a big company then it's called as Large Cap Equity Funds. If it's a small company then it's called as Small cap and in the same way Mid Cap equity Funds. Big company doesn't have much risk as compared to the smaller ones but big companies won't have growth rate as high as it can be for the smaller companies. So risk and return both are less in the big companies. ICICI prudential blue chip fund is an example of a large cap equity fund. If you invest here for a year then after a year your expected return is of 11.3% but if you invest for 5 years then your expected return can be of 19.7% . As I've told in the beginning, the more time you invest in, the more return you can expect. So there are many apps that gives facility to invest in mutual fund. Just I gave the example of the ICICI that you will get 19.7% return in 5 years, this is an expected return rate calculated by apps based on the history of this mutual fund. So it's a very good things to calculate the expected returns of the mutual funds. But one thing keep in mind friends that these apps shows expected return not the guaranteed return, it still depends on the market since the mutual fund has given such a performance in the history that doesn't mean that will perform the same way in the future. It still depends on the stock market so it will have risk, especially because it's an equity mutual funds and investment is on the stock market. So don't just look at the returns rate and invest, take some proper knowledge and then invest
Next type is Diversified equity funds. Here the investment is done in the large, medium and small cap or it's done in different companies. Next type is Equity Linked Saving scheme that is ELSS, this is a special type of Equity fund where you can save our tax. You can save the tax on it's profit. The fund manager purposely invest on such places where there's high return and also has high risk. IDFC Tax advantage is an example of an ELSS funds with the expected returns of 11.3% within a year.The next type is Sector Mutual Funds, where investments are made exclusively by companies that deal with a large sector such as agriculture. All the companies which are under the agriculture sector, they are invested on. A logistic or transport sector, so there. One example for this is UTI transportation and logistics funds. so the investment is done in that sector these funds are more risky, since all the investment is done in one sector so if the sector is going down everything depends on that. The last type of equity fund that is Index fund. Index Funds are passively Managed funds that is no agent of AMC is looking at where to invest the money here. These are passively managed that is according to the market's rate's up and downs they too go up and down looking at the price of Sensex and Nifty it varies.
Debt mutual fund
Now let's look at the second category of the mutual funds friends, that is Debt Mutual Funds. these are those mutual funds which are invested on the debt instruments. Debts instruments are bonds, debenture, certificates of deposits now these things are exactly what you can read it for yourselves. Sometime if the Government needs money and it's not getting that through the budget then the government borrows money from the people and take loans from the people. It is called as bonds. You can invest here, give to the government and the government will return you the money after a fixed interest. Now debt mutual funds are of various kinds, let's first talk about liquid funds Liquid funds are those mutual funds which can be easily and quickly converted in to cash. Liquid means that actually, It's not the liquid to drink. In economics, liquid is something that can be easily converted into cash. So this thing can be converted into cash within a day or two. But there is very little risk involved, so much so that you can basically consider a savings account as an alternative. Asset liquid fund is one such example where you will get the return of 7.1% in a year. Next type is Gilt Funds, these are those funds where Investments are done on the Government issued bonds. So technically it has zero risk because it's never possible for the Government to not return your money. Mostly the interest rate can fluctuate. Next type is Fixed Maturity plans and this can be considered as an alternative to Fixed deposits, FD friends. because it has very low risk just like FD and it is done for a fixed time. For a specific time investment is done here and you can't take the money before that. So these are the few main types of Debt funds there are more like Junk Bond scheme.
Hybrid mutual fund
Friends, basically its a mixture of a debt and equity mutual funds. Some people wants to invest in the stock market but don't want to invest all the money there and also invest some amount in the Debt instruments, so hybrid mutual funds are for them. If most of the money is invested in a Debt fund then it will be called as the Balanced savings Funds. Approximately the ratio is 70:30 that means 70% of your money is at the low risk debt funds and 30% is in the equity funds and if it's the other way, 70% is in the equity funds at the higher risk, then it is called as a balanced advantage fund and Hybrid mutual funds too have different types like arbitrage funds.
I feel I have given a lot of information and knowledge to you Now I leave it to you, go ahead and research yourself on further kinds of mutual funds and which one is better for you. The biggest advantage of mutual funds in comparison to other investment is that it is already diversified. Your risk gets very low due to diversification. because you are not investing at one place so if one thing crashes so it won't affect your money. So in comparison to the stock market, gold, real estate, mutual funds are less risky however the exact risk depends on the mutual fund that you are investing on. One more good advantage is that it is affordable, you don't have to invest a big amount altogether. You can use SIP and invest a small amount every month and all the investment of the mutual funds, friends is done by a professional expert or a fund manager who decides where to invest and where not to invest.This you don't need to so it's again a big advantage that an expert is working for you. But friends this mutual funds has a disadvantage too. If you are giving it to an unknown person, you don't know how its going to perform however he is an expert but you can't trust 100% that an expert will be right all the time. But the biggest disadvantage that used to be for the mutual funds earlier is that the agents used to take a lot of commissions for investing in the mutual funds. They say that give us the money we will invest for you in the mutual funds and deduct a lot of commissions for themselves but in todays era you can invest through apps. But you should also know the exit load and expense ratio of that mutual fund in which you going to invest.
If you don't know the Basics of share market you should also read this.
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